A chief strategist who called the stock market crash of 2020 warns that signals below the surface show stock valuations rival “every previous bubble in history” – and says the market is due for a …


In this file photo from May 6, 2010, traders work on the floor of the New York Stock Exchange in New York.
  • Lance Roberts warns that stock market indicators show fragile conditions.
  • He expects the S&P 500 to drop as much as 50% to come.
  • He also says “we are probably near a peak in the market”.
  • See more stories on the Insider business page.

According to Lance Roberts, the stock market situation is dire.

According to a number of indicators, stocks are in a precarious position even as major indices are at record highs. Valuations are at record highs. The same goes for the so-called Warren Buffett indicator, measuring total market capitalization relative to GDP. The ratio of household equity ownership to personal disposable income hovers near all-time highs and “rivals any previous bubble in history,” Roberts wrote in a recent article.

Roberts, the chief investment strategist at RIA Advisors, a financial planning firm with more than $ 1 billion in assets under management, sees even fewer less talked about metrics showing signs of overextension .

For example, the CBOE Skew Index, which basically measures how worried investors are that an unexpected event will derail markets, sits at an all-time high of 146. Plus the index, shown in orange below, is close to 100, the less investors perceive risk. The higher it goes from 100, the higher the risk they perceive.

Then there is Bespoke’s index of irrational exuberance. This shows that investors are not confident about current valuations, but still believe – at record highs – that stocks will be higher in a year from now.

“In simplistic terms, investors are as optimistic as they can get,” Roberts wrote in the post.

Exuberance of tailor-made investors

Staying with investor sentiment, Roberts, who warned of a market bubble ahead of the February and March 2020 stock market crash, cited where he thinks we are in the sentiment cycle of sentiment traders: the stage of l ‘enthusiasm. The criteria for this stage are high optimism, easy credit, a rush for offers, risky stocks outperforming and stretched valuations.

Cycle of feelings

“Currently we see all of the boxes checked,” Roberts wrote.

In a phone call with Insider on Friday, Roberts said that while it’s difficult to say exactly when stocks will peak, “we’re probably near a peak in the market.”

What the catalyst would be is unknown, but it could be the Federal Reserve’s reduction in asset purchases sooner than expected, Roberts said.

Once such a pullback occurs, Roberts said he expects it to reach up to 50%. This is due to the principle of mean reversion. Since stocks are 25% above their two-year moving average, they will likely fall back to 25% below their two-year moving average before reverting to the average.

Roberts pointed to earlier average reversals like 2008 and 2000 as a precedent.

S&P 500 Average Reversion Chart

Roberts’ views in context

Beyond a small number of typically bearish investors, most on Wall Street don’t see a 50% pullback coming.

But some banks have started issuing warnings about the potential for significant corrections.

Goldman Sachs chief U.S. equity strategist David Kostin said a few days ago that if 10-year Treasury yields quickly hit 2.5%, the S&P 500 could fall 18% from the its current level of 4,352. Morgan Stanley chief US equities strategist Mike Wilson, who called the market corrections and rebounds with remarkable accuracy in 2020, also said recently that he expects it to be. that the S&P 500 experiences a 10% correction at some point this year.

Most also agree that current valuations will reduce index returns in the future.

Stocks, in the broad sense, are walking on a thin sheet of ice. The number of indicators saying so continues to accumulate. And as the Fed prepares to slow and rising inflation continues to worry investors, the best approach for some investors in the coming months may be a cautious approach.

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